On 12 December 2022, the Australian Government released a consultation paper seeking views on the design and implementation of a mandatory climate-related financial reporting regime in Australia.
This comes following the Government’s commitment in its October budget to introducing standardised and internationally-aligned climate disclosure requirements, and Federal Treasurer Jim Chalmers’ various statements on the topic.
Background to the proposal
For some time now, Australian financial regulators have recommended that companies disclose their climate-related financial risks against the framework established by the Task Force on Climate-related Financial Disclosures (TCFD). Currently, around half of the ASX-200 report voluntarily against this framework, with the number growing steadily year-on-year.
Despite Australian businesses generally being proactive in the (voluntary) climate disclosure space, the Government recognises that investors are demanding better quality and internationally-comparable climate disclosures.
The proposed climate reporting regime is intended to form part of Australia’s broader sustainable finance framework, the development of which will be led by Treasury and includes a sustainable finance taxonomy (building on the work already done by the Australian Sustainable Finance Institute), along with further initiatives to tackle greenwashing and strengthen ESG labelling (see further details here and here).
Key features of the proposal
Initially, it is proposed that the climate-related financial disclosure requirements would apply to large listed entities and financial institutions. The consultation seeks views on the size thresholds that could apply to determine which entities are brought within the scope of the mandatory requirements, for example, market capitalisation, turnover and/or number of employees.
The consultation notes that these proposals are only the “starting point”, foreshadowing that Australia’s mandatory climate reporting regime may follow a similar phased approach as has been taken in other jurisdictions to expand the regime over time.
The consultation seeks views on the timing for any phased approach and states that the requirements “could, for example” commence in 2024, with the first reports required for the 2024-25 financial year. This would see in-scope entities making mandatory climate disclosures at a similar time as those in comparable overseas jurisdictions.
The consultation proposes the delivery of reporting requirements that are initially aligned with the TCFD framework but with flexibility to accommodate the standards being developed by the International Sustainability Standards Board (ISSB), once finalised. This could include flexibility to incorporate the growth of the ISSB standards, and the development of other reporting frameworks, beyond climate issues (in particular, the Taskforce on Nature-related Financial Disclosures – or ‘TNFD’ – framework and the expansion of the ISSB standards to broader topics, such as biodiversity and eventually social and governance issues).
The consultation proposes that there will be some requirements to disclose scope 3 emissions, on the basis that this is recognised as an increasingly important metric for assessing climate-related risks. This will be a significant undertaking for many entities, due to resource and capability constraints and limits on the availability of quality data to accurately quantify value chain emissions. For this reason, views are sought on whether scope 3 disclosures might be required under a separately phased timeline from the broader requirements.
In respect of scope 1 and 2 emissions, the consultation recognises that disclosure is already covered by other Australian regimes, such as the National Greenhouse & Energy Reporting (NGER) framework. The consultation seeks views on how to ensure consistency and minimise duplication for entities falling within the scope of multiple reporting regimes.
The consultation includes a question on the considerations that should apply in respect of disclosure of transition plans and use of greenhouse gas offsets to meet climate targets. The consultation notes that this reflects the requirements of the TCFD framework and draft ISSB standards. The latter in particular requires detailed disclosure on the extent of an entity’s reliance on carbon offsets, how those offsets are generated, whether the offsets are subject to third-party verification or certification, and any other significant information relating to the credibility and integrity of the offsets (including assumptions on permanence).
Currently, Australia’s periodic reporting requirements are principally backward-looking in nature, which affords reporting entities a considerable degree of certainty over disclosure (and carries lower levels of disclosure risk). Importantly, the consultation recognises that, in contrast, reporting on climate risks and opportunities involves disclosure on a substantial amount of forward-looking information. Unlike counterparts in some other jurisdictions, reporting entities and officers in Australia may be comparatively more exposed to risks associated with disclosure of forward-looking information given Australia does not have a “safe harbour” regime for this type of disclosure.
The consultation confirms that this warrants consideration of how the climate disclosures should interact with current misleading and deceptive prohibitions in the Corporations Act 2001. In particular, views are sought on the interaction between climate disclosures and the need for forward-looking information to be on “reasonable grounds”, and explicitly calls out the US Security and Exchange Commission’s proposed safe harbour regime for disclosures on scope 3 emissions under its draft climate disclosure rules. It also solicits views on whether there are other mechanisms which could balance the need to incentivise disclosure and penalise misconduct.
The consultation notes that there is growing demand for assurance of climate disclosure, and that some jurisdictions have imposed mandatory assurance requirements for some climate disclosures (for example, New Zealand). The consultation seeks views on what level of assurance (if any) should be required under the Australian regime.
The consultation proposes that the new overarching requirements would be imposed through amendments to the Corporations Act 2001 and Corporations Regulations 2001, with reporting made to ASIC and ASX. This aligns with the existing regulatory framework for financial reporting.
It is further proposed that the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) would prepare the standards for climate reporting. These standards would set out the more prescriptive detail to be reported for each of the overarching disclosure obligations in relation to climate governance, strategy, risk management and targets and metrics.
The consultation notes, however, that there is at least one alternative approach, which would see the broadening of the existing requirements to disclose material risks as part of an operating and financial review (OFR). Under this approach, the overarching obligations for climate disclosures would not be embedded in legislation but would be articulated through regulatory guidance or standards.
In terms of regulatory oversight, the consultation seeks views on three possible structures:
- confirm the AASB as the entity responsible for developing, making and monitoring climate and sustainability-related standards;
- establish a separate (and additional) sustainability standards board; or
- reform existing financial reporting bodies into a single entity.
Interestingly, the Government has already (on 28 November 2022) released a consultation on an exposure draft to amend the Australian Securities and Investment Commission Act 2001 to confer AASB with powers to make sustainability standards.
The consultation closes on 17 February 2023, although Treasurer Chalmers has flagged that additional consultation on more detailed proposals is likely once the final ISSB framework has been released next year. This perhaps signals a quicker transition to ISSB-aligned reporting than initially expected in the Australian market.
CONSULTATION CHEAT SHEET
Disclosure on climate governance, strategy, risk management and targets and metrics would be required, in alignment with the TCFD framework. Flexibility would be inbuilt to accommodate the future ISSB standards.
Entities within scope
Initially, large listed companies and large financial institutions, subject to size thresholds. A broader range of entities are expected to be brought within scope over time.
Possible phased application from 2024, with first reports due for the 2024-25 financial year.
Two main options are being consulted on:
- legislative amendments to the Corporations Act 2001 and Corporations Regulations 2001 would set out the overarching obligations for climate disclosure (governance, strategy, risk management, targets and metrics), with more prescriptive disclosure requirements detailed in regulatory standards or guidance; or
- existing requirements to disclose material risks as part of an OFR would be broadened, with the overarching obligations for climate disclosure set through regulatory standards or guidance.
Three different structures are being consulted on for regulatory oversight: confirm the AASB as the responsible entity; establish a separate board; or reform existing financial reporting bodies into a single entity.
Some notable elements
- Some requirements to disclose scope 3 emissions, potentially on a separate phased timeline to the broader requirements.
- Disclosure of transition plans and carbon offsets.
- Consideration of how forward-looking climate disclosures interact with the provisions on misleading and deceptive conduct in the Corporations Act 2001 (notably including the requirement for forward-looking information to be on “reasonable grounds”, and consideration of whether a safe harbour may be needed).
- Possible assurance requirements for some climate disclosures.